Yuan Won’t Be Down for Long
Executive Summary
China’s main economic indicators in April either held to their lows or declined further. Industrial output rose 8.7% y/y, turning in the same anemic performance as in Q1. Fixed asset investment rose16.8% y/y in real terms, down 0.8 pps. We expect general slowdown to persist in the short term. Though the real estate market was cooling, price declines were rare – and we see outright housing price collapse as unlikely.
Retail sales of consumer goods rose 11.9% y/y, flat on Q1. CPI rose 1.8% y/y, down 0.5 pps. The ex-factory price index of industrial products fell -2% y/y, and PPI fell -2.3%.
Exports rose 0.9% y/y. That is still relatively weak, and comparable to the performance of imports, which rose 0.7%. But imports had risen 1.6% in Q1.
Central Bank Governor Xiaochuan Zhou announced on May 10th that the government wouldn’t pursue a major stimulus, which we interpreted to mean it wouldn’t undertake monetary stimulus, either. In April, M2 grew 13.2% y/y, less than in any month in 2013. Financial institutions’ loans increased 13.7% y/y, the lowest rate since 2003, and deposits rose by a record low 10.9%. That can be partly attributed to the new financial reform, which diverted savings to various shadow banking concerns. If the government continues to claim it won’t undertake monetary stimulus, we expect loan portfolio and deposit growth to keep shrinking.
The yuan has declined 2.9% against the dollar since January, after appreciating by about 35% since 2005. We argue that this is due to China’s economic slowdown, plus a correction for previous overvaluation driven by massive hot money inflows. We expect currency depression won’t last long, as we are confident that the Chinese economy is robust. Though the economy is experiencing internal structural changes, the still-significant U.S.-China trade deficit will push China to strengthen its currency further over time.
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